Certain coins on the exchange occasionally have high funding rates, such as -3%. If you open 2 times the contract, you can earn 6% of the fee income every time (usually 8 hours) when you settle the capital fee. If you open 10 times the contract, you can earn 30%. For different exchanges, such as OKX and Binance, there will be different funding rates, then we can use the funding rates for arbitrage. Detailed method:
What is funding rate
The funding rate is the fee that a trader needs to pay or receive while holding a leveraged contract position. Its size depends on the difference between the contract price and the market price of the underlying asset and the direction of the position held by the trader (long or short). Funding rates are usually settled at certain intervals (e.g. every hour).
Specifically, if the contract price is higher than the underlying asset market price (funding rate is positive), traders holding long positions need to pay traders holding short positions to keep market participants in balance. Conversely, if the contract price is below the market price (the funding rate is negative), the trader holding the short position needs to pay the trader holding the long position.
When is the funding rate charged?
Generally speaking, it is charged every 8 hours. Beijing time 24:00, 8:00, 16:00.
How to charge funding rate
The exchange deducts or adds funding fees from the trader's account holding the position. Funding charges are usually deducted from or added to the margin required to hold a position, so it directly affects a trader's account balance. Through your positions, calculate the fees that should be charged or received. Importantly, you will be able to receive funding fees even if you open a position at the last second before charging.
How to use funding rate arbitrage
1. Hedging on different exchanges
The funding rates of different exchanges may vary greatly. For example, LPT is -2.5% on Binance and -3% on okx. In this way, we can open long on okx and open short hedging with the same position on Binance. In this way, risk-free arbitrage can be achieved under the premise of low leverage and no liquidation. At settlement, the capital fee earned is 0.5%, and 10 times the contract is 5% profit. The greater the difference in funding rates between exchanges, the higher the profits.
2. Spot contract hedging
For example: Generally speaking, the interest rate for borrowing and lending will be lower than the funding rate. , when the funding rate is negative, the spot borrows currency to go short, and the contract opens a long position of the same position. In this way, the position is hedged, and during settlement, the funding fee for opening a long contract can be earned risk-free.
The same applies when the funding fee is positive.
Note: All cryptocurrencies may fluctuate violently or even completely return to zero. The currencies mentioned above do not constitute investment advice, DYOR.
